- July 7, 2015
- Posted by: Art Berman
- Category: The Petroleum Truth Report
Traders were busy throwing in the towel on oil futures this week just as the first solid data and hope appeared that oil prices may be starting on the long road to recovery.
As oil prices approached $52 per barrel on Tuesday, July 7, the EIA released the July Short-term Energy Outlook (STEO) that showed an increase in global demand.
Figure 1. New York Mercantile Exchange crude oil futures, Continuous Contract #1 (CL1) (Front Month).
Source: Quandl
(Click image to enlarge)
Global liquids demand increased 1.26 mmbpd (million barrels per day) compared to May (Figure 2).
Figure 2. World Liquids Supply and Demand, July 2013-June, 2015.
Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
This is the first data to support a potential recovery in oil prices. For months, great attention was focused on soft measures like rig count, crude oil inventories and vehicle miles traveled, all in the United States. These are potential indicators of future demand but hardly the kind of data that should have moved international oil prices from $47 in January to $64 in May.
The relative production surplus (production minus consumption) moved down to 1.9 mmbpd (Figure 3).
Figure 3. World liquids production surplus or deficit (total production minus consumption)
and Brent crude oil price in 2015 dollars. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
That is certainly good news but an over-supply of almost 2 mmbpd is hardly cause for celebration. The new demand data from EIA brings over-production of liquids back into the October 2014 to January 2015 range that resulted in Brent oil prices falling from $87 to $48 per barrel.
Oil prices dropped sharply this week as news of the Greek financial crisis and the free fall of Chinese stock exchanges suggested weaker demand for oil as the global economy falters. The EIA demand data does nothing to change this troubling economic outlook but it does confirm the seemingly obvious notion that low oil prices result in greater consumption.
In recent posts, I have emphasized that falling global demand for oil is key to OPEC’s strategy to keep prices low for some time. The July STEO underscores this problem for two key markets–the Asia-Pacific region–29% of world consumption–that includes China, Japan and India, and the United States–21% of world consumption. Growth in Asia has slowed from 7% annually in 2012 to only 2% today (Figure 4).
Figure 4. Asia-Pacific liquids consumption and year-over-year change.
Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
While somewhat less alarming than Asia, U.S. growth has slowed from 6.5% annually in 2013 to about 4% today (Figure 5).
Figure 5. U.S. liquids consumption and year-over-year change.
Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
U.S. crude oil production declined a mere 40,000 barrels per day in June (Figure 6). U.S. production fell 120,000 bpd in January. That was an good sign that the global over-supply would be alleviated sooner than later so prices could recover.
Figure 6. U.S. crude oil production. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)
Then, an increase in prices in February and exceptional capital flow to U.S. tight oil companies resulted in increased U.S. production in February, March and April. Company executives boast about the resilience of U.S. tight oil production as if over-production and low prices are something they are proud of and that their shareholders value.
ConocoPhillips CEO Ryan Lance made macho proclamations at the OPEC meeting in June that tight oil “is here to stay,” single-handedly undermining the remote possibility that a production cut might result from the cartel’s meeting.
U.S. E&P companies should get realistic about the situation they are in. Price will win this game. OPEC holds those cards for now.
If I may ask, why US oil consumption be use as a future crude oil problems of the rest of the world. I want to comment your work and the platform at Wich u share with passion this unick and comprehensive crude oil information. Thanks and God bless u and your family
Sani,
The U.S. consumes 21% of world liquids and Asia-Pacific consumes 29%–together, almost half of world consumption. The direction of these principal markets, therefore, provides a leading indicator of the trend of the entire world. If consumption (demand) growth is slowing in the U.S. and Asia-Pacific as the charts in my post show, that is a concern for OPEC and for oil demand.
All the best,
Art
Having just had a quick look at momentum in Brent prices, it appears that prices will continue to fall to $46-$48. There may be a slight bounce at this price but it would appear that prices will continue to fall to $40 before the end of this year.
Pat,
Thanks for your comments. I see that Brent is up about 50 cents so far today at $57.38. We will have to see how the Greek and Chinese situations play over the next few weeks. Also, IEA will publish their July OMR later this week. The June OMR forecasted a 400,000 kbpd drop in world demand. Their revised forecast will almost certainly affect short-term Brent prices.
Art
Art,
When will the significant decline in U.S. production that should occur as a result of the 50% cut in rig counts begin in earnest? assume the 50-60% first year decline in oil production from Shale wells won’t show up until all the wells that were drilled are finally fracked and competed and are producing. There must have been thousands of wells drilled and not completed nor producing for many months after the total daily rig count fell so drastically. After the holes were drilled and pipe was run, the rig would have been released and stacked and not moved to another location and the rig being stacked would have reduced the daily rig count but the high initial flush post frack producing rate from that well wouldn’t have hit the market for many months. So this factor gave an apparent extension to high oil supply produced for many months after the big collapse in the daily rig counts.
Someday soon it seems like the US Oil Production will begin a precipitous decline. When?
Gene,
It is important to understand that production is all that most shale companies have to support their stock price. They will maintain production at any cost with whatever cash they have. If they don’t, investors will abandon their stock, the net value of the company will plunge and loan covenants will be triggered. That is a death scenario.
A tight oil production drop has been deferred because of higher oil prices (and therefore cash flow) and a huge influx of investment capital. Decline, however, is unavoidable. April Bakken production is down about 184,000 bopd according to Drilling Info. Bakken is the most sensitive of the 3 main tight oil plays to price because of its high cost of transportation.
It is difficult to say when but I believe it is already in progress and we will see it in the present quarter. Patience.
All the best,
Art
1. Interesting work, last 6 months. Like it better than the shale gas work from before. Not just that the answers are more to my liking, but it seems more observation forward and more looking at recent things. And just more open.
2. I think you are going to be off on the prediction of a 0.6MM bpd drop for LTO from JAN to JUN. Seems like we went up, not down.
3. If production were key to shale producers they would not have cut rigs by 60%. I think a simpler answer is that they did respond to the price signal and did so by cutting capex 50%. There are some projects that are still positive NPV and those are where the 50% of remaining capex is going.
4. The reasons why US oil has not dropped so fast as many predicted (including me!) are
a. “lag” (both natural spud to oil lag as well s things like contracts with cancellation penalties, hedges, etc.)
b. “poised for growth”: the industry with 1500+ rigs was poised to add 1.5 MM bpd+ in growth. This is a drop in production that you don’t notice, the drop of expected growth.
c. The decline rate while huge for a second month shale well is not as big for US overall. Stipper wells have essentially no decline (unless you turn them off…which could happen, I agree). The baseline conventional is probably a few percent (old capacity, what we had in 2008 or so after long decline). Plus even the LTO includes some older wells in the population (second year well not as bad as first year). So, talking about the 70% drop for an individual shale well is just a sound bite. Let’s say that at SEP2014, when production was 9 MM bpd, that the decline was about 3MM bpd/year. Still huge. But a 33% decline, not 70%.
d. Pareto impact. The rigs (and really the projects) cut were the weaker ones. For the same reason that doubling the rigs to 3000 would face diminishing returns, so also does cutting them by 60% mean that projected production cut is less than expected.
If you figure a pretty moderate Pareto implication (66-33, not “80-20”) than that means 1500 rigs (rounding the number) were going to give you 4.5 MM bpd of oil production (covering the 3MM of decline and giving 1.5 of growth), from SEP14 to SEP15, starting with 9MM. In such a case, then cutting rigs to 500 would still maintain production, at 9. 600 would actually still be growing it. [I don’t know the exact levels and not saying 640 will grow things forever…just making the point that cutting to 600 is not so extreme. You really want to cut the shale monster’s legs off…MORE rigs needed to be cut.]
P.s. I’m not strong on demand, but my feeling is that price-based demand will be self-limiting. IOW, if prices go up, it goes down. And there are some macro headwinds in China, Greece, etc. Demand is probably a wash.
Nony,
Although interesting, your comments are opinion and not based on any data.
My earlier 600,000 bpd decrease in tight oil production may be wrong but it was a reasonable model based on the data that I had at the time. I believe that a 400,000-600,000 bopd decrease is still reasonable but higher oil prices and a flood of new capital to tight oil companies in Q1 2015 is new data that has modified the model and deferred the decrease and probably spread it over more time.
We only have reliable production data for March so it is really difficult to say how much tight oil production has declined. The cycle from spud to first production in the Bakken is 5 months and, in the Eagle Ford and Permian, about 3 months. Since rig counts did not begin to fall in earnest until mid-December 2014, the effects of reduced drilling should not be reflected in the production data until at least April to May.
The Bakken is the only reasonably current and reliable data source and April production in North Dakota was down 59,000 bopd from December 2014.
Your pareto argument applies equally to all oil field production, the difference being that tight oil decline rates are about 7-10 times that of conventional oil production. There is no pass for tight oil decline. It is just a matter of when it shows up in the data.
You may not be strong on demand, as you say, but those involved in serious data analysis are strong on demand as much as supply.
Production is key to shale producers but if a company outspends cash flow by 140% when oil is $90 per barrel and by 320% when oil is $60 per barrel, capex must be cut because it is not there.
Thanks for your comments,
Art
Fair enough. Except I don’t agree that companies should have funded CAPEX from free cash flow when the price was at 100. You don’t expect 30% growth, high capex companies to be self-funding.
See minutes 22-28
http://www.c-span.org/video/?325957-1/discussion-future-us-fracking
P.s. I am not an analyst. I am an Internet commenter. A civilian. 🙂
Let’s not forget Iran. A nuclear deal will allow Iran to rejoin the global economy for the first time in 36 years.
This paves the way for Iran to double its oil exports from 1.2 to 2.4 million barrels a day immediately, and then double them again once desperately needed energy infrastructure investments are made.
It won’t take long for this impending tsunami of oil to hit the markets. The Reuters news agency is reporting that 38 million barrels of Iranian oil are sitting in 15 VLCC tankers slow cruising the Persian Gulf and Indian Ocean.
The second the ink is dry on any US/Iran agreements, these ships are sailing for western and Asian ports to make delivery.
This may be the reason for the plunge in the price of oil over the past few weeks, from $62 to $51, some 18%.
Saudi Arabia has responded to the decline by aggressively cutting prices for their largest customer, and ramping up production even more, in a determined effort to boost market share.
Therefore, the March low of $43 now seems within range, and maybe then some. You have already seen this in the contango for far month futures markets, which have widened fantastically. The world has returned to paying huge premiums for storage.
Jill,
I mentioned Iran in my comment back to Nony. Please note Mark Lewis’ comments to CNBC earlier this week:
Thanks for your comments,
Art
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